Saudis Pay the Price for OPEC Leadership

This isn’t the result the Saudis were looking for, and they might just decide to fight back.

Saudi Arabia’s leadership of OPEC and non-OPEC production cuts comes at a cost. Not only is it trimming export volumes, it is also losing market share in key destinations, most gallingly, to countries that are also part of the output deal. That could herald fierce competition for market share once restrictions are lifted.

After almost of year of negotiations, OPEC member countries agreed in November to reduce output by around 4.5 percent (with a couple of exemptions). The following month they secured pledges from a group of non-OPEC countries to cut their production. Most important of these was Russia, which agreed to trim output by 300,000 barrels a day, or 2.7 percent.

The kingdom might have expected that they were all in this together. Compliance with the cuts has been much better than expected.

Walking the Walk

OPEC and non-OPEC countries’ compliance with their output deal has been better than expected

Source: Bloomberg

However, the OPEC leader has lost ground to rivals selling in some of its key Asian export markets, most particularly China and India. It has also seen flows to the U.S. slump to some of the lowest levels of recent years.

No Cuts Here

Even as Russia cut oil production, its exports exceeded 2016 levels every month this year

Sources: Bloomberg, CDU TEK

Saudi Arabia was already seeing its crown as the biggest supplier to China being snatched away by Russia, but the cuts that came into effect in January have accelerated that shift. True, Russia complied and pared output, but its crude oil exports in the eight months of this year are actually higher than they were on average last year.

China Crisis

Saudi market share in China is slipping away to other producers bound by the output deal

Sources: Bloomberg, China customs

And it’s not just Russia stealing a march in the Middle Kingdom. Fellow OPEC member Angola has boosted its sales there, too. Flows from Iraq are also accelerating, driven in part by stakes in its fields held by Chinese companies. And, the Saudi share of Chinese imports has fallen to around 11 percent on average over the three months from June to August, down from 15 percent on average in 2015.

The situation in India is little better. Saudi exports to the world’s fastest growing oil market have been overtaken by supplies from Iraq, which increased dramatically in the first months after output cuts came into effect in January.

The picture is even starker for crude sales to the U.S. Imports of Saudi crude fell to 637,000 barrels a day in the week to Sept. 22, according to data from the Energy Information Administration. Weekly imports have dipped below 650,000 barrels a day only seven times since the beginning of 2011 — four of those have occurred since the start of June.

Losing America

U.S. crude imports from Saudi Arabia have fallen steadily since the start of June

Source: EIA

After chairing a meeting between OPEC and other major producers in Vienna on May 25, Saudi oil minister Khalid Al-Falih told reporters that exports to the U.S. would drop “measurably.” Since the start of June, inflows of his crude to the U.S. have averaged 808,000 barrels a day, equivalent to 10 percent of total imports. That is down from 14 percent in 2016 and 15 percent in the first five months of 2017.

Ceding volume and share in key export markets may be the price that Saudi Arabia has to pay to lead efforts to rebalance the global oil market. But it is not sustainable for a country that holds the world’s largest stock of conventional reserves and is among the cheapest sources of supply on the planet.

The kingdom is already seeking a stake in a planned 1.2 million barrel a day refinery on India’s west coast and is pursuing a partnership with China National Petroleum Corp. to own a share in the Anning refinery in China’s Yunnan Province. Both projects are intended to create captive markets for Saudi crude in the future.

Before they are completed, and once output restraint is lifted, which could begin as soon as April if the deal is not extended, expect the start of an aggressive round of Saudi competition for sales.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.